Earnings Call Transcript - JBHT Q4 2021

Operator, Operator

Good day and thank you for standing by. Welcome to the Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Vice President of Finance and Investor Relations, Mr. Brad Delco. Please go ahead.

Brad Delco, Vice President of Finance and Investor Relations

Good morning. Before I introduce the speakers, I would like to take some time to provide some disclosures regarding forward-looking statements. This call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, estimates, or similar expressions are intended to identify these forward-looking statements. These statements are based on J.B. Hunt’s current plans and expectations that involve risks and uncertainties that could cause future activities and results to be materially different from those set forth in the forward-looking statements. For more information regarding the risk factors, please refer to J.B. Hunt’s annual report on Form 10-K and other reports and filings with the Securities and Exchange Commission. Now, I would like to introduce the speakers on today’s call. This afternoon, I am joined by our CEO, John Roberts; our CFO, John Kuhlow; Shelley Simpson, Chief Commercial Officer and EVP of People and Human Resources; Nick Hobbs, Chief Operating Officer and President of Contract Services; Darren Field, President of Intermodal; and Brad Hicks, President of Highway Services. At this time, I’d like to turn the call to our CEO, Mr. John Roberts, for some opening comments. John?

John Roberts, CEO

Thanks, Brad. Good afternoon. Thank you for joining our call today. We all thought 2020 was a remarkable year in our history, but I’ll consider 2021 as a good contender for being equally challenging. And in the midst of perpetual challenge, we have continued to see our collective resiliency and strength during these unique times. Our teams have adjusted and adapted to multiple scenario changes impacting our customers’ ability to thrive. In 2021, our leaders made bold calls to increase investments in our people, our technologies, and expanding our fleets across our asset base. We have long been committed to following a disciplined approach for all capital allocations and believe these investments are good for our customers in the long-term. I can’t say enough about the way every one of our team members has risen to the opportunities presented in this current environment. Accordingly, we have done extensive research on where we stand regarding being competitive in total compensation for our people as we move into 2022. Our team leaders have unanimously approved comprehensive changes to our base wages, incentive compensation, and benefits. Increasing our awareness for how we approach attracting and retaining the best talent is critical to our mission of creating the most efficient transportation network in North America. The overall growth we experienced in 2021 is unprecedented, once again revealing the necessity of our services and confirming the approach our people take on solving our customers’ challenges. We added 1,778 tractors to DCS, 6,284 containers in Intermodal with 531 net tractor adds and 3,605 trailers for our 360box program in Highway. We continue to work strategically with our equipment providers on build and delivery plans as we head into 2022. With the growth coming out of 2021, we anticipate ongoing demand for all types of power and trailer equipment. We also look forward to working with our rail service providers to find improvements across all aspects of intermodal service, capacity management, and utilization. Lastly, I’ll comment on our efforts relating to sustainability. Over the past several years, we have worked to better understand, communicate and advance our positioning in this important area. While we have seen good progress and have been recognized by many third parties for our efforts, we also believe we have important work to do. We are committed to our mission to create the most efficient transportation network in North America, and we are also committed to being transparent on the progress of our sustainability journey. This concludes my remarks. Our executives will provide more specific information, so I would like to turn the call over to our CFO, John Kuhlow.

John Kuhlow, CFO

Thank you, John, and good afternoon, everyone. My comments today will follow a similar pattern as our previous calls, where I’ll review our recent performance on a consolidated level. I’ll then provide some commentary on our CapEx plans for 2022, as well as our approach to capital allocation and then I’ll close with some thoughts on our financial priorities for the coming year. Overall, we were pleased with our fourth quarter performance, highlighted by growing revenues 28% and operating income 55% over the prior year period. We saw positive year-over-year revenue performance across all segments and positive operating income performance in all segments, except for DCS, which Nick will cover in greater detail in his remarks. As I look across our business, the common denominator in terms of our pain points continues to be labor-related, with wages, salaries, benefits, and recruiting trends being a concern, both for drivers and non-drivers. We continue to elevate investments in our people, as was evidenced by our decision to provide a special bonus in December of nearly $11 million to our frontline workers for their efforts in working through the supply chain challenges facing our customers and the industry. Below the line, interest expense was slightly lower and the tax rate slightly higher than the prior period, resulting in GAAP EPS of $2.28 a share, a 58% increase versus the prior year period. As has been stated in previous calls, the impacts of network congestion, labor shortages, and general supply chain challenges are well known and have continued to have a meaningful impact on our business and are likely to persist, particularly given the heightened challenges evolving around COVID infections across our country. We ended the quarter with $356 million of cash, which was slightly higher than planned. Last quarter, I provided you with updated thoughts on our 2021 net CapEx, which was expected to fall within the $1 billion range; however, we missed this by approximately $130 million, largely due to supply chain delays impacting our ability to take timely delivery of our equipment. We remain committed to these investments and capacity to help serve our customers, and we anticipate net CapEx for 2022 to be approximately $1.5 billion. We continue to prioritize our capital to invest in our business, support our dividend, repurchase shares, and opportunistically execute on our M&A strategy, all while maintaining a modest net leverage ratio of around 1 times EBITDA, and importantly, continuing to maintain our investment-grade status. Before I close out my comments and in light of expecting some questions around our 2022 outlook, I’d like to provide you with some context—not guidance—but context for our financial priorities in 2022. These priorities include continuing investments in our people, maintaining a strong balance sheet to support all of our planned investments, and focusing on generating appropriate returns on the capital we are investing to grow our businesses and serve our customers. This disciplined focus on the priorities enables us to manage the business for long-term growth and success. That concludes my remarks. I’ll turn it over to Shelley.

Shelley Simpson, Chief Commercial Officer and EVP of People and Human Resources

Thank you, John, and good afternoon. Today I want my commercial update to focus first on a quick review of 2021 and how we were able to deliver for our customers. I will then focus my comments on the market and how we are going to approach the ongoing supply chain challenges for and on behalf of our customers. Finally, I’ll finish up with some updates on our priorities for J.B. Hunt 360 multimodal digital freight platform as we move forward. As we have discussed over the past year, the freight environment has been extremely volatile and unpredictable, not just for capacity providers but also for those that we are providing capacity for to meet their needs. In this environment, we as an organization, like our customers, have had to adapt to this disruption; and I firmly believe that our comprehensive supply chain solutions approach has been key to helping our customers over the last year, where we were able to honor our commitments, particularly during peak season. Another key element of our success was a significant commitment and investment in physical assets across all of our business segments, from containers and chassis to trucks and trailers. That said, I would be remiss to leave out the most critical element of our success, our people—our drivers, mechanics, load planners, and all of those behind the scenes helping our frontline workers succeed. Tying it all together, of course, was our technology platform, J.B. Hunt 360, which gives us a distinct advantage in sourcing efficient capacity for our customers. Simply put, our investments in people and technology put us in a position to say yes in 2021 and has me excited for our future growth as more and more customers are leaning in. As we look at the market today and try to prepare for the year ahead, many components of our business plan and go-to-market strategy are similar to those exercised here in our recent past. The market remains challenging, capacity-constrained, and unpredictable, and we will need to remain agile in our approach to securing capacity for our customers. Some unique areas impacting capacity include the ability to source new equipment, which is likely to keep used truck prices elevated, resulting in higher small carrier rates as well. I see customers wanting to lock up more capacity in dedicated arrangements and lean into technologies that drive efficiency in their supply chain and how they procure capacity. As an organization, we see tremendous pent-up demand to convert highway freight to intermodal with elevated truck rates, the tight labor market, higher fuel prices, and a 60% improvement in carbon efficiency intermodal offers versus truck. Needless to say, 2022 will present us with many opportunities to grow, and we will approach the market similar to how we always have, serving our customers as our top priority while maintaining sound financial discipline. Finally, as I look at the investments we have made building out and scaling J.B. Hunt 360, I continue to be encouraged where we are relative to our long-term plan. User activity and engagement continue to accelerate and break records across both carrier and shipper platforms, solidifying the value of optimizing and transacting in real-time in a frictionless process. As we look ahead to this year, we see opportunities for further acceleration, as we continue the rollout of our new automated tools to drive even greater efficiency in our organization and higher service quality for our customers. These tools will enable, enhance, and leverage our people and core technologies to drive more efficiencies in the marketplace, which brings us even closer to our mission to create the most efficient transportation network in North America. To wrap up, we continue to uncover innovative ways to accomplish that mission, including the collaborative work with Google and the recently announced strategic alliance with Waymo, where I see tremendous opportunity for us to explore solutions that merge two of the most innovative companies in the transportation industry—autonomous driving and our multimodal digital freight platform, J.B. Hunt 360. That concludes my comments and I’d now like to turn it over to Nick.

Nick Hobbs, Chief Operating Officer and President of Contract Services

Thank you, Shelley, and good afternoon. Today I am going to review the performance of both Final Mile and Dedicated segments, as well as provide some thoughts on the priorities for these businesses as we move forward. I will also provide some updated thoughts from an operational perspective on our ability to source equipment and some updated views on the driver market. I’ll start with Final Mile. As we have discussed over the last several quarters, we have been focused on making the right investments in our people and processes to ensure a high level of service quality and execution for the safe and timely delivery of our customers’ products to their customers’ homes. That trend continued in Q4 as service quality and safety will be a cornerstone to long-term growth and success for our business. These investments, along with labor challenges and supply chain disruptions for some key markets that we serve, have continued to weigh on margin performance in the most recent quarter, in addition to some startup costs for some newer accounts. As we set out to differentiate our service product, we have also set out to demonstrate the differentiated value we bring to our customers and the market. We believe some of that differentiation is being recognized as we are coming off our largest sales year for new business in 2021. That said, in the coming months, we do expect to put some business at risk as we focus and put even greater emphasis on generating the appropriate financial returns on these investments. Going forward, we continue to see a solid pipeline of organic growth opportunities with the potential to supplement some of that growth with smaller tuck-in acquisitions as a way to build out our service capabilities and customer list. Shifting to Dedicated, our Dedicated business continues to have momentum as our backlog and pipeline for new business startups continue to build to record levels, despite the onboarding of nearly 1,800 new trucks in 2021. In terms of truck sales, we sold over 2,500 trucks of new business last year, a new record for us, which includes an incremental 663 units specifically in the fourth quarter. Historically, we have shared a target to sell 800 to 1,000 trucks per year, and at this point, we feel it’s appropriate to update that long-term target to 1,000 to 1,200 based on our team’s ability to execute. As planned or expected, these startups are putting near-term pressure on margin performance due to elevated driver pay and recruiting costs, and specifically for this quarter, due to the special bonus provided to our frontline employees. However, we remain confident in our ability to price and manage each of our accounts to the appropriate levels of profitability and returns, which should reveal itself in the coming quarters. In terms of priorities going forward, we will remain focused on executing our growth plan, as well as maintaining our culture for operational excellence, high service, and safety, while navigating challenges around a modestly less experienced team as our pace of growth has been robust. Closing out with some operational updates, as you could tell by my dedicated comments, there’s a lot of momentum, which has put additional pressure on our organization to source both drivers and equipment. I would say both the truck and trailer market, as well as the driver market, remain extremely tight, which raises some concern for our ability to execute on our growth plan to meet the demands of the business. That said, we are working closely with our OEMs to secure product delivery and continue to recruit tirelessly to meet the driver demands across our organization. That concludes my remarks, so I’ll turn it over to Darren.

Darren Field, President of Intermodal

Thank you, Nick. Good afternoon, everyone. Today, my comments will recap the performance of our intermodal business in 2021 and specifically the fourth quarter. I will also provide an update on our significant investment to expand our capacity with our equipment orders and finish up with some thoughts about the outlook for the business in 2022 as we anticipate strong demand for our services as a result of our investments and the value of intermodal in the truck-to-rail conversion equation. I’d like to start by reviewing our recent performance. Demand for our intermodal service remained strong in the fourth quarter, but similar to recent trends, it was reflected in the volume performance for the business as network congestion and restrictions hindered a large amount of our potential capacity. That said, I am proud of our team and its ability to onboard the equipment available to us to ensure that we met our commitments to our customers during their peak period of demand. On a positive note, we did see improvements in the quarter in parts of the network, specifically the speed in which customers were able to turn our equipment. However, those improvements were effectively offset by further deterioration in other parts of the network, namely rail velocity. For the quarter, box turns achieved minimal improvement from the third quarter. Needless to say, a lot of work remains to be done. As a result, volumes for the quarter were down 3% year-over-year and by month volumes were down 4% in October, down 3% in November, and down 1% in December. The onboarding of new equipment was slower than we anticipated, with only 2,700 units delivered in the quarter and approximately half of our 12,000 orders for the year. Naturally, this will push more units into our delivery plan for the first half of 2022. This investment in additional capacity and the corresponding investment in additional trucks and chassis, and most importantly, our people, puts us in a good position to serve our customers and focus on growth in 2022. In addition to these investments, we continue to work closely with our customers and rail service providers to improve velocity in the system to unlock the latent capacity in the network. Predicting the exact timing of improvement in network fluidity is difficult, particularly in light of some of the recent disruption caused by new COVID cases impacting our operations and our customers’ operations. As we look forward to the year ahead, and similar to what you have heard earlier, we are optimistic about our opportunities to grow the business. We have executed a plan that puts us on a solid growth trajectory based on items within our control. Consistent with our historical strategy, we will focus on striking the right balance between volume and price while maintaining our financial discipline on targeting appropriate returns on our business. Of course, returns and margins are impacted by items like velocity and asset utilization, which will also be a key component in terms of how we manage the business as we progress through the year. In anticipation of questions on both volume and margin expectations for the year, my answer is, it depends—but know that the business will be managed to protect our investments and our returns on those investments. In closing, intermodal’s value proposition remains strong, supporting our view of long-term sustainable growth. We continue to see ample opportunities to convert highway freight, as well as transloading freight into our domestic containers. We believe our service, backed by our people and the ownership of our equipment, is differentiated in the market and even more so when combined with the power of the J.B. Hunt 360 platform that allows us to source capacity efficiently when needed. That concludes my remarks, so I’ll turn it over to Brad Hicks.

Brad Hicks, President of Highway Services

Thank you, Darren, and good afternoon, everyone. I am going to cover the performance of highway services, which includes both Integrated Capacity Solutions and truck services. But before I do, I would just like to take a moment to thank all the members in ICS and JBT for how they continue to rise to the occasion to deliver on behalf of our customers, particularly during what was another tight and capacity-constrained peak season. You have heard us talk now for quite some time about how we plan on leveraging our investment in our people and our technology to support rapid growth in this area of our business, and as I look back on the past year, I couldn’t be more pleased with how this team has responded to deliver on that statement. I’d like to first cover ICS or our Integrated Capacity Solution segment. We delivered $739 million of revenue in the quarter with year-over-year growth of 26%. This growth was driven primarily by an increase in revenue per load, even as total loads were down 1% year-over-year in the quarter. Truckload volume was up 3% versus the prior year period. Going into peak, we felt like our volume comps would decelerate based on our rapid growth a year ago from the third quarter to the fourth quarter, in addition to some of the discipline we instilled in our bid strategy earlier in the year; this, combined with scaling and productivity benefits, is reflected in our profitability improvement. As we look forward, our teams are excited about the rollout of two technology enhancements this year that will enable greater productivity for our people and better service for our customers and carriers, which will support our growth and scaling of the business even further. To close out my comments on ICS, I would like to establish some priorities for the year, which include continuing to invest in and leverage our people and technology, focusing on operational excellence, so customers and carriers have a world-class experience utilizing the J.B. Hunt 360 platform, and creating value for customers and carriers that would support further market share gains. Shifting gears now to truck or JBT, revenue grew 85% year-over-year to $259 million while operating income improved to $26 million in the quarter, achieving results that this segment hasn’t seen since 2005. It’s important to highlight that our go-to-market strategy has evolved as the makeup of our truck service offering has continued to gravitate towards a more asset-light model. I remain encouraged by our ability to disrupt the traditional way of serving customers in this segment to discover new and innovative ways to scale into the large addressable drop trailer markets that have historically been served by large asset-based carriers. By leveraging the power and investments we made in our J.B. Hunt 360 platform and building out our 360box network, we are well-positioned for growth as financial returns support our strategy for further investment. Similar to ICS, these investments will focus on building out further capabilities with our technology, investing more in our people, and expanding our physical assets, such as additional trailing capacity. We will continue to maintain our discipline on our capital allocation in this area of investment, but I am encouraged by our progress and the opportunities for long-term sustainable growth in these segments. In closing, we continue to see a lot of opportunities in our highway service businesses to provide an efficient source of capacity for our customers by leveraging our investments in our people and J.B. Hunt 360, our multimodal digital freight platform. As I said last quarter, much work has been done, but much more remains, and we will stay focused on delivering on our mission to create the most efficient transportation network in North America. That concludes my comments, so I’ll turn it back over to the operator to open the call for Q&A.

Operator, Operator

Your first question will come from Scott Group with Wolfe Research.

Scott Group, Analyst

Hey. Thanks. Good morning. Let me see if I can squeeze a few into one. Darren, just on the container count, it sounds like 6,000 containers are getting pushed into the first half of the year. Are you adding additional containers beyond that in the second half of the year? Where do you expect to end? And then just from a pricing and margin standpoint, any directional color on how much of the yield is accessorial? And as long as this environment stays tight like this, now that you are above 12% from a margin standpoint, do you think you’ll stay above 12%?

Darren Field, President of Intermodal

Well, my goodness, Scott, you managed multiple questions there. Good morning to you. I don’t know where you are, but if it's morning there, I wouldn’t want to be hanging out with you. So, listen, we are not satisfied with the flow of the new equipment in the fourth quarter. Certainly, delays in the transportation of that equipment impacted us and that has pushed 6,000 into 2022. We are going to add capacity in 2022 beyond those. We are not prepared to release a number like that today. As it relates to accessorial and whatnot, I anticipated this question, of course, and really only have one answer for you at a time today. We are not going to tell you how much was accessorial and how much was core pricing. We set out, I think, every time I have been on an earnings call, I have talked about our focus on pricing to return profile. That continues to be the case. Certainly, in 2021, we experienced some unusual characteristics and the equipment utilization was hampered, and we took action, and certainly that has been part of our results in the fourth quarter. But we also had meaningful costs to recover in the pricing cycle last year. 2020 saw really significant cost increases that we experienced, and we were able to communicate that with customers and certainly recover some of those costs. We certainly have additional pressure on driver wages, and we are constantly talking to both our customers and rail providers about the need for velocity improvements in our assets. So as we have always done, we will price for a return profile. There are probably times if utilization of our equipment is difficult, it may require slightly higher margins because utilization is hindered. But certainly as we can get benefits or better velocity on equipment, maybe the same margin requirement isn’t there. We issued long-term margin guidance of 10% to 12%, and for the calendar year 2021, we achieved an 11% margin. So we are right in the middle of our long-term guidance, and I certainly would anticipate in 2022, we are able to continue growing while also pricing in an effort to recover cost exposure that we have.

Operator, Operator

Your next question comes from Allison Poliniak with Wells Fargo.

Allison Poliniak, Analyst

Hi. Good morning or evening, I guess. On J.B. Hunt 360, certainly a unique environment, and the business has grown as the technology has expanded. Has this environment at all altered your long-term goals? Are there new opportunities or needs that are out there that you think you could pursue with that?

Shelley Simpson, Chief Commercial Officer and EVP of People and Human Resources

Hi. Good morning and good afternoon. This is Shelley. I’ll try to take that. Certainly, the more that we are working with our customers and transportation providers, the more opportunities that we are seeing, hence the announcement we just made recently with Waymo. I think that there is a great opportunity to eliminate the inefficiency that’s happening in the market. Our customers are helping us drive that strategy; carriers are helping us drive that strategy. As we said in our opening remarks, we are pleased with the progress; we are ahead of schedule. But we do have new ideas on the roadmap and we continue to want to explore anything that is logically adjacent to what our customers are asking us for and that we can deliver with a proper return; that is something we are going to investigate and continue to move forward with in our mission.

Operator, Operator

Your next question comes from Justin Long with Stephens.

Justin Long, Analyst

Thanks. I wanted to ask about the $11 million special bonus. Could you give us some additional color on how that was spread out across the different segments? And then in Dedicated, as we look at margins and how they have progressed sequentially, that bonus may be a part of the Q4 decline. But I am guessing a lot of it’s coming from the significant amount of fleet additions you have made sequentially in the last couple of quarters? So as we think about the growth in Dedicated going forward, at what point do you think we can get back to that targeted margin range of 12% to 14%?

Brad Hicks, President of Highway Services

Hey, Justin. This is Brad. I’ll give you the numbers and then kick it over to Nick to respond to the second part of your question. Intermodal's impact was $3.4 million, DCS' impact was $5.9 million, ICS was $100,000, FMS was $900,000, and JBT was $400,000 for a total of $10.7 million.

Nick Hobbs, Chief Operating Officer and President of Contract Services

Yeah. Justin, this is Nick. I’ll just tell you that we feel very good about our ability to operate in that targeted range. When I look at just our base business, we are clearly operating in that range. I can’t predict the future. I can just tell you that our pipeline is much larger today than it was last January. So if I could tell you when the demand will back off on the amount of add that we have coming, I can tell you when our margins will get back down there. We are seeing some impacts just from driver wages; it’s a timing issue. About 80% of our business has indexes in it, so the timing of the wages we might have to give to drivers versus when we implement rate increases in the index could be off a little bit. That impacts us, but our view is that we take care of the customer for the long-term and not put business at risk just for two or three months of rate increases. We feel very solid about our core business and how it’s performing. We are excited about the new business that’s coming in and doing well. So, we just barely got outside the range for the year. I think that’s pretty good, considering we added over 1,800 trucks and sold over 2,500.

Operator, Operator

Your next question comes from Jon Chappell with Evercore ISI.

Jon Chappell, Analyst

Thank you. Good evening, everyone. Darren, in the last call you said you implemented some programs that better encourage equipment turns, and then you noted earlier in your prepared remarks that you are seeing some of the benefits there, but it’s effectively being offset, like some of the rail velocity? Where do you think you are on these initiatives? So if rail service does improve, as we all hope it does, can you really see an inflection in those box turns, especially as you are onboarding the rest of those 12,000 that you didn’t get in 2021?

Darren Field, President of Intermodal

Well, I mean, certainly, we did see some minor improvement in the fourth quarter from the third quarter. But minor, I mean very, very minor, effectively flat. We highlighted that rail velocity took a little bit of a step back in the fourth quarter, like you said. We anticipate rail velocity to have some improvements. I know that all of our rail providers want nothing more than for that velocity to improve. So, I am confident the efforts underway will significantly boost our capacity available in the market from Intermodal. The good news is demand remains strong. We have customer business that we could have onboarded in the fourth quarter that we weren’t able to because of a slowdown in velocity and capacity. So we remain really bullish on our opportunity to fill up that capacity in the combination of new containers coming onboard and a return to maybe pre-pandemic velocity stats. We really feel strongly that we have a lot of demand, and we see that in other parts of our business. There’s business operating within the J.B. Hunt enterprise today that Intermodal is the correct solution for, but in 2021 truckload remained a solution due to customer transit time requirements or a lack of capacity in the market from intermodal.

Operator, Operator

Your next question comes from Amit Mehrotra with Deutsche Bank.

Amit Mehrotra, Analyst

Hey. Thanks. Darren, just on intermodal volume, is there a better opportunity to access rail capacity on the backend this year because of some market share shifts occurred? Could you just talk about what impact that has, if any, on your ability to grow volumes? And then, I just wanted to follow up on the pricing question earlier. You talk about cost and pricing for cost, but obviously, it’s a very tight market and fuel costs are up. I am just trying to understand what you think the market-based pricing opportunity is this year and do you think that market opportunity allows for double-digit pricing growth for contracts that come up in 2022? Thank you.

Darren Field, President of Intermodal

Okay. Well, the market is going to answer that question for us. We are certainly always out there competing. We are aware of prices that are winning business and we are aware of prices that are losing business in the competition. So certainly if the market presents an opportunity for double-digit increases, I would tell you from experience that it’s highly unusual for our rates to climb into the double-digit range without significant cost pressure. It would be highly unusual for our rates to climb in the double-digit range without corresponding cost challenges coming out of the market. Those are going to dominate, particularly driver wages, but certainly asset utilization is also playing a role.

John Roberts, CEO

And Amit, what was the second part of your question? I am sorry. Did we address both of them?

Amit Mehrotra, Analyst

Capacity on BNSF?

Darren Field, President of Intermodal

Oh! Capacity on BNSF. Let me just clarify that we are aware of another channel that certainly left BNSF and went to Union Pacific, and certainly, that presents an opportunity. Those lifts were occurring on BNSF, and we are aligned with BNSF in a growth strategy. We have discussions with BNSF daily about our efforts to grow together and we have a lot of focus in that area in 2022.

Operator, Operator

Your next question will come from Jason Seidl with Cowen.

Jason Seidl, Analyst

Hey. Thank you, Operator. Good evening, everybody. I wanted to look a little bit at the volume growth on the intermodal side. Clearly, you were impacted by some of the congestion on the rails and the supply chain. What percentage impact would you think it would have on the volumes in 2021? I am just trying to frame it so how we can think about it clearing up? What kind of opportunity presents itself in 2022 and beyond?

Brad Hicks, President of Highway Services

Hey, Jason. This is Brad. I’ll take a crack at that. But we don’t give specific targets or guidance; we haven’t set an expectation of what realistic intermodal turns are. If you assume we have been running mid-1.6 to low 1.6 on monthly box turns and assume, I don’t know, 1.8, 1.85, which is probably where we were running pre-pandemic, that’s probably an approximate way to get to a number that says what the opportunity is if we got back to those pre-pandemic velocity levels that supply chain was moving from both our customers and rail capacity service perspective.

Operator, Operator

Your next question comes from Ravi Shanker with Morgan Stanley.

Ravi Shanker, Analyst

Thanks everyone. This is not a 2022 guidance question, I promise. But just on ICS, is that now structurally a 3% to 4% margin business irrespective of what the cycle does? Or could that margin be under pressure if spot rates do rollover next year? And also, as a follow-up on the accessorials, can you confirm that the accessorials were higher or lower sequentially in the fourth quarter relative to the third quarter?

Brad Hicks, President of Highway Services

Okay. Ravi, I’ll start and maybe let Darren speak to the accessorial component there at the end. This is Brad Hicks. We don’t give guidance. I do think that if you go back the last two full years, we made substantial investments in the business, both in people and technology, that will allow for scale and leveraging of the platform. We continue on that journey. We are satisfied with the progress that we have made, but we still have work to do. So I would anticipate that we would stay on a positive trajectory as we move forward since we are seeing the benefits of the tech investments both through leverage and efficiency gains, and I think you can see that from our overall growth and results over the last several quarters. We are certainly encouraged, but as I said in my prepared comments, we are not satisfied yet and we have work to do, but I do think we have continued to show progress and we’ll continue to show progress towards our long-term objectives.

Darren Field, President of Intermodal

On the accessorial question, sorry, Ravi, but we are just not going to answer that question.

Operator, Operator

Your next question will come from Brian Ossenbeck with JPMorgan.

Brian Ossenbeck, Analyst

Hey. Good evening. Thanks for taking the question. I wanted to see if you can just give us a broader perspective of the challenges in labor, hiring, and retention. I think it was mentioned you made some pretty significant changes across multiple areas. It may be helpful if you can run through some of the availability and wage pressures and challenges that you are seeing across the warehouses, terminals, and drayage? And then specifically, it sounds like Dedicated might be more of a short-term impact with some of the unseated truck challenges you have right now, which seems to be somewhat unique for your business that’s been growing pretty well over the last couple of years. Appreciate the color. Thank you.

Brad Hicks, President of Highway Services

Hey, Brian. This is Brad. I’ll let Nick address the driver side of that and then Shelley will comment on the broader organization side of your question. So…

Nick Hobbs, Chief Operating Officer and President of Contract Services

Hi, Brian. Yeah. Driver wages are up significantly across nearly every division. Again, we don’t do anything across the board; it’s by site, by location. But our cost per hire is up. We have witnessed higher sign-on bonuses, and the market is very difficult, particularly with drivers facing COVID. We have a higher percent of our fleet with COVID right now than we have had at any other time. They are not as severely impacted but more off. So we are feeling that impact. Additionally, we are observing impacts on our orientation due to COVID, with home schedules versus actual shows. Orientation timings are affected. While we think we have addressed the driver market reasonably well, filling trucks during new startups is still taking longer. As many trucks are starting up, that has continued to be a challenge. We are also feeling pressure on maintenance tech sides in our shops, and that affects some of our turn times along with getting equipment turned. There are constant new challenges we face around wages, and we face wage pressures in the shop as well that we are addressing. So I’ll end there and hand it over to Shelley.

Shelley Simpson, Chief Commercial Officer and EVP of People and Human Resources

Yeah. When we work comprehensively around all of our labor challenges, we really moved from a defensive mode with what’s happened with COVID to an offensive mode. It’s allowing us to move forward and think about the investments we need to make for growth for our customers. We have looked across all of compensation, starting with our benefits package. There were specific changes we made to our benefits, as well as total rewards, whether that was in benefits or also what happened from short-term cash incentives to also long-term incentives. We have taken a more comprehensive approach, probably for the first time across the entire organization from drivers to our maintenance technicians and our office employees. We are leaning in; we are on the offensive side of that, preparing for growth inside all our segments and all our support groups. We see this happening here at the beginning of this year. We have been investing into our labor all of last year. But as Darren mentioned, we must align our costs and prices to maintain our investment in drivers, maintenance technicians, and office employees, ensuring they are ready, equipped, and available to help our customers.

Operator, Operator

Your next question will come from Chris Wetherbee with Citigroup.

Chris Wetherbee, Analyst

Hey. Thanks. Maybe for Darren, can we talk a little bit about the fleet again in intermodal? I just wanted to get a sense of based on what you are seeing on the ocean today, how many boxes you think you might expect in Q1 and Q2 out of that 6,000? And then I know there’s a lot of variables out there about 2022, and that’s fine. Given how strong the demand environment sounds for intermodal services, assuming you get the boxes and you have some greater fluidity in the market, how many boxes would you want to grow beyond the 6,000 in 2022? What would be sort of what you see as the market opportunity for you?

Darren Field, President of Intermodal

Man, Chris, that’s the magic question, isn’t it. We have a meaningful percentage of those 6,000 that are literally on vessels, either at anchor waiting to unload or in some form of transportation. I don’t know that we have decided yet to break out how many. I think it’s a fair assumption to just spread those 6,000 more or less evenly over the first half of the year. If we can move them in faster than that, we will. I am aware that I have given direction on this call for the last two calls regarding equipment count expectations, and we haven’t met either of those. So I don’t want to give too much detail, but we are trying to get all of that equipment here just as soon as we can. I think that given all of the talk of velocity challenges in 2021, we will be a little careful watching what comes from those velocity improvements. There is a considerable amount of growth capacity in the system we have today, plus the 6,000 boxes yet to be received; we can really grow significantly. We have a lot of confidence in our rail providers, our rail network, and our ability to grow business there. In the event, if velocity can’t improve, then we will have to go buy more equipment to grow at the same pace, but that will present its own new challenges. So I don’t have an answer for you on how many we would like to have, but we would like to have as many as we can fill up to be honest and there’s no great answer to your question, but we have tremendous growth opportunities with our customers. We are confident in the demand equation, and we know that if we can improve velocity, we can grow real quickly. If we can’t improve velocity, then we’ll have to secure more containers to grow.

Shelley Simpson, Chief Commercial Officer and EVP of People and Human Resources

Chris, I could take it up one level just for our customers overall. I would say demand is very strong across all of our services. Whether it’s in container adds, 360box adds, or adds in Dedicated or Final Mile, our customers are asking us to grow. We are really walking through either bid season or communication in those conversations in Dedicated and Final Mile to help us determine what we should do, and we want to have a balanced approach, ensuring we do what we say with our customers on our commitments and grow as much as possible with the proper financial return. Bid season so far has gone well. We’ll continue to get through bid season to help refine what that looks like across all of our segments.

Operator, Operator

Your next question will come from Jordan Alliger with Goldman Sachs.

Jordan Alliger, Analyst

Yeah. Hi. So curious from a very high-level standpoint relative to, let’s say, early December—are you more or less optimistic on the whole supply chain congestion issue, using, let’s say, over the first half? Or is it just pushed back later? And then just a clarification on Dedicated fleet, given what you said on purchases and sales, are we looking at a Dedicated fleet down in 2022 versus the fourth quarter of 2021?

Brad Hicks, President of Highway Services

Yeah. Hey, Jordan, this is Brad. I’ll ask Shelley to address the first part of your question about our view on just to rehash your question. Our outlook on the supply chain today versus where it was early December, and then to the second part of your question about Dedicated and fleet additions, I’ll let Nick address that.

Shelley Simpson, Chief Commercial Officer and EVP of People and Human Resources

I would say throughout all of 2020 and 2021, when we would make a prediction, typically we would be wrong. And so although I would like to be optimistic, this latest round of COVID has caught everyone by surprise. So I can’t say that I feel optimistic about the supply chain challenges going away in the near-term. We are focused on ensuring that we help our customers be ready to smooth out their supply chain challenges and that we are there for them. I would say any time there is more crisis in the supply chain, our moat agnostic solutions really come to the forefront because we are fairly indifferent as to how we solve for our customers. We wrap around our customers to solve for us and continue to move business. For us, we are going to be there for them. I can’t really say if we are optimistic or not because I am not certain what lies ahead, but we are planning for that; we are on the offensive side as I have said earlier on equipment, on people, and on technology. We think we can serve our customers even more so this year than last year.

Nick Hobbs, Chief Operating Officer and President of Contract Services

And I will just say that we have sold 2,500 trucks and started about 1,800 of them, and so that means we have a significant amount starting up already in the hopper before we sell anything this year. We are waiting on some trailing equipment to start some stuff. But we are holding trades and doing various other things on the power side. So, I would say Q1 is going to be just like the last two or three quarters for us. Right in that ballpark is where we think it’s going to be from a number standpoint.

Operator, Operator

Your next question comes from Ken Hoexter with Bank of America.

Ken Hoexter, Analyst

Hey. Good afternoon. John, you mentioned CapEx, but I think it was about $1.5 billion, if you are at what net $877 million, you said $150 million rolls over. Can you kind of walk us through how you get to the $1.5 billion? Where do you see that step up? And then Brad, just real quick as a cleanup, I think you mentioned some new tech at ICS. Should we expect costs to step up there and see margin pressure, or is that just blended into the cost?

John Kuhlow, CFO

Hey, Ken. This is John. I’ll provide a bit of color on the CapEx. We are not really in a position to give too much detail. But of the $1.5 billion, I’d say around 10% is for general corporate purposes, building enhancements, and things like that. The rest is likely split evenly between trucks, and by trailing equipment I mean containers, dedicated trailers, and also 360box, which would be around $700 million. Then the rest would be for tractors, another $700 million, which includes both replacement and growth for 2022. I’d like to add that we have also provided guidance for the full year 2022 based on what we want to order, what we think we can receive. There is a lot of noise and uncertainty as the OEMs try to meet their plans and get us the equipment we need. We’ll continue to update our progress there. But just know that risk is inherent in that number based on what we can get in place and service.

John Roberts, CEO

And then, Ken, on part two here, the technology enhancements refer to the tail of the investment that we have been making. What I am referencing here is that we will be deploying some internal tools that will allow and should allow our people’s productivity to be improved, which we would expect will allow us to advance our strategy as we move forward. I am really excited about finally getting done with some of those tools that we are going to utilize to make better decisions, faster decisions, and enhance the overall productivity of our workforce.

Operator, Operator

Our next question will come from Tom Wadewitz with UBS.

Tom Wadewitz, Analyst

Yeah. Good afternoon. So, I wanted to ask, I think there is a consensus view out there that there will be some supply chain improvement through the year; I share that view. I wanted to get your sense of what if that’s wrong and we don’t see supply chain improvement, and you kind of have a repeat of 2021 where things are pretty congested through the year; what does that look like for J.B. Hunt? And then just maybe a short second question, what’s your best read on gross margin percent for ICS in 2022? Should we think of it as stable as maybe the base case or any thoughts on that?

Shelley Simpson, Chief Commercial Officer and EVP of People and Human Resources

I feel like I have answered some of this before. I think we are in a great position for our customers. We did make the call early in 2021 to add more equipment to lean in, and you are seeing that equipment now starting to come online. I think we are in a great position with our customers, and we will continue to be very close to them to ensure we can meet our customer’s needs. In 2021, more than any other year, I felt we were able to move freight for our customers that wouldn’t necessarily have moved in that mode or shipment type in the past. If a customer had a shipment, we could say yes. J.B. Hunt 360 allowed for much of that, but also the interconnectivity of all of our segments working closely together, understanding where capacity was and how we could help our customers. I don’t see a lot of negative impacts for our organization if it were to say congested again; we are already set up for that. We are continuing to talk closely with our customers. We understand that we must help our customers to reduce costs in their supply chain. However, if nothing changes from today, we will continue to lean into our customers and ask how we can help them more through our people, technology, and our equipment.

John Roberts, CEO

And then, as we have stated, we are not interested in giving guidance around our return expectations for the year. I think we are early in the bid season. We need to see how the market does and continues to respond to the work we have been doing. If you look back over the last several years, going back to 2018, I am at least encouraged that we have returns close to profitability levels we saw before the heavy lift tech investments. However, we are not inside of our desired long-term range yet at this point. So we are working every day. The technology that I just referenced is hopeful to aid us in that, and we would anticipate and expect to continue on our journey towards the 4% to 6% range that we stated previously.

Operator, Operator

And we have time for one more question, which will come from Brandon Oglenski with Barclays.

Brandon Oglenski, Analyst

Hey. Good evening, everyone. Thanks for putting me here at the end. Shelley, I guess, if I could just follow up on that, or maybe for Brad, it looks like headcount was actually down in ICS, and core truckload growth maybe 3%. Could you just talk about the market dynamics there? Has this reached a level of maturity that we were contemplating maybe a year and a half ago, or is there still a lot more to go on that platform?

Brad Hicks, President of Highway Services

Really, what it comes down to is the headcount you see there is direct to the business. Because of how we have managed and restructured over time, there are some headcounts that support the business that are not inside that business unit. I would say obviously we are leveraging technology in an effort to grow headcount at a disproportionate level to the growth of the business, and that’s our focus. We are satisfied with the progression we have seen there; perhaps the numbers that are published aren’t entirely revealing of the total headcount inside the organization that supports the business.

Operator, Operator

And this will conclude our Q&A session. I would now like to turn the call over to CEO, John Roberts, for closing remarks at this time.

John Roberts, CEO

Thank you. I’d like to first say I appreciate a much more balanced discussion here today. Though we still have work to do, I kept a little score here on the questions that were asked for our different leaders, and I am encouraged and we’ll continue in that vein. I would say the two big takeaways are that the businesses are all lined up, well positioned; looking to grow, look to continue the momentum that we have. Collectively, because of this individual strength, we have compounded strength. I like the question—what if it gets better? When Shelley was answering that question, I was thinking to myself: okay, so that means we keep doing what we are doing here. We have learned how to do that. If you look at the strength we are demonstrating through this pandemic and through this supply chain disruption with really a focused approach on investing for customers, serving customers, generating the right amount of return, we continue to invest for customers again. We don’t really have a predisposition to one element or another as we continue to move down this road of being agnostic. We just want to answer that question. I think our momentum with the customer base is continuing to gain strength, and they appreciate that we will invest for them in equipment and that we will pivot away from investments if a better answer presents itself. Closing out the year, we are thrilled with the accomplishments and thrilled to be able to pay our people that well-deserved special bonus. I’d just close by saying that our people focus is really where it’s at for us. I have never seen the kind of exhaustive work this year to understand our position and balance that against risks of not taking action versus taking action and then considering how we need to make those investments return for us the same way we think about our assets. But we have great technology, we have great assets and equipment, but our people are the difference. They— I know that’s a little bit cliché to some of us, but when it gets down to push and shove, our folks will be there, and they are going to get the job done. What will this year bring? We will see. We thank you for your call and your attention today.

Operator, Operator

This concludes today’s conference call. Thank you for participating. You may now disconnect.